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Operator: Welcome to Sallie Mae First Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the prepared remarks. [Operator Instructions] I would now like to turn the conference over to Melissa Bronaugh, Head of Investor Relations. Please go ahead.

Melissa Bronaugh: Thank you, David. Good evening and welcome to Sallie Mae’s first quarter 2024 earnings call. It is my pleasure to be here today with Jon Witter, our CEO; and Pete Graham, our CFO. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. Listeners should refer to the discussion of these factors in the company’s Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, results of operations, financial conditions, and/or cash flows, as well as any potential impacts of various external factors on our business.

We undertake no obligation to update or revise any predictions, expectations, or forward-looking statements to reflect events or circumstances that occur after today Wednesday, April 24th. 2024. Thank you. And now, I’ll turn the call over to Jon.

Jon Witter: Thank you, Melissa and David. Good evening everyone. Thank you for joining us today to discuss Sallie Mae’s first quarter 2024 results. I’m pleased to report on a successful quarter and progress towards our 2024 goals. I hope you’ll take away three key messages today. First, we’re off to a fast start in 2024. Second, we’re encouraged by the trends we have seen in our credit performance. And third, we believe we have positive momentum for the rest of the year. Let’s begin with the quarter’s results. GAAP diluted EPS in the first quarter of 2024 was $1.27 per share as compared to $0.47 in the year-ago quarter. Our results for the first quarter were driven by a combination of strong business performance, improvement in credit trends and the gain on our first loan sale of the year.

Loan originations for the first quarter of 2024 were $2.6 billion, which is up 6% over the first quarter of 2023. We have seen our application volume grow as well, increasing 4% year-over-year. We believe that this is a solid start to 2024. Credit quality of originations was consistent with past years. Our cosigner rate for the first quarter of 2024 was 91% versus 89% in the first quarter of 2023. Average FICO score for the first quarter of 2024 was 748 versus 746 in the first quarter of 2023. The credit improvement that we observed in 2023 has continued through the first quarter of 2024. Net private education loan charge-offs in Q1 were $83 million, representing 2.14% of average loans in repayment. This is down 29 basis points from fourth quarter of 2023 and better than expectations.

Although we are still in the early stages of implementation, we are pleased with the medium term performance of our loss mitigation programs and are seeing improvement in our roll to default rates, as well as positive performance trends in all stages of delinquency. As we mentioned in our year-end call, we did see a rise in delinquencies in the fourth quarter due to what we described at that point as the mechanical results of borrowers entering into new payment programs who are in their qualifying period. We have added additional disclosure around both our delinquency and forbearance metrics and are seeing the desired results. Excluding those borrowers that are in their loan modification qualifying period, delinquencies are down quarter-over-quarter from 3.1% in Q1 of 2023 to 2.7% in Q1 of 2024.

Loans in disaster or hardship forbearance were 1% at the end of Q1 2024, consistent with performance in Q1 of 2023. The $2.1 billion loan sale that we were able to execute in the first quarter generated $143 million in gains. We are encouraged by the price we received, which is in line with our expectations. We still expect to sell additional loans in 2024 with market conditions dictating the timing and our balance sheet growth targets dictating the volume. The balance sheet growth expectations for the year remains at 2% to 3%. In first quarter of 2024, we continued a capital return strategy by repurchasing 1.3 million shares at an average price of $20.32. We have reduced the shares outstanding since we began this strategy in 2020 by just over 50% and at an average price of $15.95.

We expect to continue to use the gain and capital release from future loan sales to programmatically and strategically buyback stock throughout the year. Pete will now take you through some additional financial highlights of the quarter. Pete?

Pete Graham: Thank you, Jon. Good evening everyone. Before we jump into the key drivers of earnings for the quarter, I wanted to mention a change to our guidance metrics that you may have noticed in our earnings release, investor presentation. We have discontinued reporting non-GAAP core earnings and its related metrics, as it has been identical to our GAAP earnings in the last eight quarters, including this quarter. As such, for purposes of our 2024 guidance, we are now using GAAP earnings in place of non-GAAP core earnings in the calculation of the earnings per common share metric. However, the guidance range is unchanged at $2.60 to $2.70. Now, for a discussion of key drivers of earnings. Year-after-year, our quality loan portfolio generated significant net interest income.

For the first quarter of 2024, we earned $387 million of net interest income. This is down 4% from the prior year quarter and level with the fourth quarter of 2023. Although average yields of interest-earning assets are up about 45 basis points over the year ago quarter, average interest-earning asset balances are down slightly, which resulted in a $26 million decrease in interest income from the year ago period. Interest expense was $44 million higher as borrowing rates increased approximately 75 basis points from the prior year. Net interest margin for the first quarter was 5.5% compared to 5.7% in the year ago quarter. We continue to believe over the long-term that low to mid-5% is the appropriate NIM target. Our total provision for credit losses in the income statement was $12 million first quarter 2024.

This is comprised of an increase in provision of $145 million related to volume and prepayment assumption updates, offset by a release of $133 million associated with the $2.1 billion loan sale we completed during the quarter. The majority of the increase of provision is related to origination volume during the main peak that occurs in the first quarter of each year. Additionally, we reduced our long-term prepayment assumption, which accounted for approximately 26% of the increase during the quarter. Although this change in assumption has a negative impact on provision, this is a long-term positive as we will continue to keep our interest-earning assets on our balance sheet for a longer period of time. Net charge-offs for our private education loan portfolio in the first quarter were $83 million or 2.1%, consistent with the year ago quarter.

Our private education loan reserve at the end of the first quarter is $1.4 billion. or 6.1% of total student loan exposure, which includes the on-balance sheet portfolio plus the accrued interest receivable of $1.4 billion. Our reserve rate shows improvement over the 6.4% in the prior year quarter and is consistent with levels at the end of 2023. Private education loans delinquent 30 days or more, 3.4% of loans in repayment, a decrease from 3.9% at the end of 2023 and consistent with the 3.4% at the end of the year ago quarter. As Jon mentioned earlier, we’ve refined our disclosure around both delinquencies and forbearance to get more visibility into our credit performance. When adjusting the numbers that I just discussed to remove the borrowers who are in a three-month qualifying period related to one of our new programs, improvement in delinquencies is compelling.

At the end of the first quarter, loans delinquent 30 days or more, becomes 2.7% of loans in repayment as compared to 3.2% at the end of 2023 and 3.1% in the year ago quarter. We believe that this is a medium term indicator of the success of the new programs, and we’ll continue to monitor and disclose performance in the coming quarters. First quarter operating expenses were $160 million compared to $143 million in the prior quarter and $155 million in the year ago quarter. This was a 4% increase compared to the first quarter of 2023. The majority of this increase relates to increase in volume in the quarter compared to the prior year, with applications increasing 4% and disbursements increasing 6%. Total non-interest expenses in the first quarter were $162 million compared to $202 million in the prior quarter and $157 million in the year ago quarter.

Finally, our liquidity and capital positions are solid. We ended the quarter with liquidity of 19.1% of total assets. At the end of the first quarter, total risk-based capital was 13.5% and common equity Tier 1 capital was 12.3%. Another measure, the loss absorption capacity of the balance sheet is, GAAP equity plus loan loss reserves over risk-weighted assets, which was a very strong 16.2%. We believe, we’re well-positioned to continue to grow our business and return capital to shareholders going forward. I’ll now turn the call back to Jon.

Jon Witter: Thanks Pete. I hope you agree that we have executed well in the first quarter and that you share my belief that we have positive momentum for the full year 2024. There has been some question about the potential implications of delays and technical issues associated with the Department of Education’s launching of the new FAS [ph] reforms. At this point, we do not believe that these issues will cause material impact on volume, but may likely condense an already short peak season. Externally, we continue to partner with our schools to assist families through this process. Through the calculation tools available on our website, our scholarship search capabilities available through Scholly and other materials we provide to families, we are there to help make this peak season as frictionless as possible.

Internally, we are preparing for a condensed peak with enhanced staffing, improved digital and other self-service capabilities, and other actions. While early, we are also paying attention to the impact of one of our major competitors exiting the market. We believe this will afford the opportunity to compete for new business. While too early to declare definitively, early analysis suggests a slight volume increase from borrowers that previously had a relationship with that competitor. We expect to see the first real signs of opportunity during peak season over the summer and into the fall. In addition to our originations growth in the first quarter, Pete also mentioned the continuation of slower prepayment speeds, both of which are positive for balance sheet growth and interest income as we look toward the second quarter of the year.

We will continue to focus on operational execution, expense management, and NIM to drive results. Let me conclude with a discussion of 2024 guidance. As I mentioned earlier this evening, we are encouraged by both the successful Q1 origination season, the positive trends we are seeing with credit performance, and our first loan sale execution of the year. We are also optimistic that these things will lead to a successful 2024. We believe the medium term success of our programs will continue to normalize and we look forward to updating you on that performance progress throughout the year. At this time, we are reaffirming the 2024 guidance that we communicated on our last earnings call, all key metrics. With that, Pete, let’s go ahead and open up the call for some questions.

Operator: The floor is now open for questions. [Operator Instructions] Our first question is coming from Sanjay Sakhrani with KBW. Please go ahead, your line is open.

Steven Kwok: Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. I guess the first question I have is just around the quarter. Relative to your original expectations, how did the quarter come in just because we’re trying to tie that back to your guidance that was maintained. Was it that the quarter was in line? Or was it better than expectations that is early in the year and thus you’re maintaining your guidance? Thanks.

Pete Graham: Yes, I’d say it’s largely in line with what we expected it would be. And although there are some positive trends and developments in the quarter, as Jon said, it’s still earlier in the year. So, we’ll wait and see how things develop over the coming quarters, but we feel good about the start.

Steven Kwok: Got it. And then just around the credit side. It’s nice to see that the credit trends are funding positively. Just as we look at the reserve rate, like over — as your credit metrics has been improved, how should we think about what the reserve rate can get to over time? Thanks.

Pete Graham: Yes, I don’t think that we’re ready to call a number for the absolute reserve rate over time. But I think it makes sense that as we continue to see improvements in credit metrics like charge-offs, et cetera, that we will continue to see modest improvements in the overall level of reserves that were required to put up. I think that, coupled with the changes in underwriting that we’ve made and we continue to sort of prove each year, the origination quality is very strong. [indiscernible] its appropriate time as well.

Steven Kwok: All right. Thanks for taking my question.

Operator: We’ll take our next question from Terry Ma with Barclays. Please go ahead, your line is open.

Terry Ma: Hey, thanks. Good afternoon. So, it looks like you’re getting some pretty positive results from our loan mod programs. Maybe just talk about what more you need to see or what more has to happen before you get some more confidence in kind of updating your guide for the year?

Jon Witter: Yes, Terry, it’s Jon, I’ll take that one. As you indicated, we are very pleased with the progress and the results that we’ve seen so far. All of the metrics that we can look at, at the early stages of a customer entering a loan mod or meeting or modestly exceeding our expectations. So, examples of those types of metrics would be things like what is the success rate of people making their qualified — the three qualifying payments. So, we like all of that. And I think we sort of described it as sort of positive medium term results. Ultimately, though, the real proof here is do folks graduate from their programs, do they enjoy strong financial success on the other side of those programs. And I think that’s just something that we will gain more and more confidence in with each passing month and each passing quarter.

But I think given it was still relatively early stages, I think we felt like we want to see a bit more of that seasoning before we thought about updating guidance.

Terry Ma: Great. That’s helpful. Thank you.

Operator: We’ll take our next question with Jeff Adelson from Morgan Stanley. Please go ahead, your line is open.

Jeff Adelson: Hey good evening guys. Thanks for taking my questions. Yes, just along the same lines of credit. I guess as we look at the increased use of these mods and the extended grace periods. Maybe — are there any kind of metrics you can point us to in the success rate? I know you just alluded to that, how you’re seeing qualifying payments, et cetera. But I guess I’m just wondering if you look at — I don’t know if this is the right way to look at it, but if you look at the delinquency rate, the percent of extended grace period and the percent in hardship forbearance, that number has gone up versus a year ago. So, how do you give us that confidence that those are going to perform as expected and help your credit even in a year from now and you’re not just putting them into a bucket where the default rate isn’t going to show up for now?

Jon Witter: Yes, Jeff, look, fair question. We can certainly go away and think about is there additional disclosure that we want to make there. We have not done that today. Certainly rest assured, we look very hard at those varied metrics internally. Those are the various metrics that we then project out forward when we start to think about guidance for the year as well as the long-term normalization of guidance sort of back to the 1.9% to 2.1% range. But ultimately, the way that we’re all going to get comfortable with that is to see these programs fully seasoned over the next several quarters and get back to that target delinquency rate that we think is the right delinquency and net charge-off rate for us to be shooting for. So, we’ll think about the question of additional sort of disclosure, thank you for that. But I think we feel very comfortable that what we’re seeing is consistent with the guidance that we have given.

Jeff Adelson: Okay, got it. And just to circle back on the comment about your competitor exiting you kind of alluded to a slight benefit from their existing customers showing interest. I guess, why wouldn’t there be a more meaningful benefit? I mean you’ve got peak summer season coming with freshmen going to school. It seems like it might be more meaningful than just more of a slighter modest benefit given their presence in the market before?

Jon Witter: Yes, Jeff. I think the way I would explain that is you have to remember that the competitor in question did not leave the market until after they had fulfilled their commitment and sort of made the opportunity for the spring loans that they had already committed to. So, I think we talk often about the fact that in our business, spring follows fall, fall doesn’t follow spring, that sort of second semester follow-on business, the die is largely cash for that in the first quarter. So, I think we’ve been extremely consistent in saying we expect it to be really very little impact of this strategic move by this competitor until we got to the summer peak season. I think we were pleasantly surprised at the — sort of the modest improvement and sort of additional incremental business that we saw there when we looked at customers that had existing relationships with this competitor because quite frankly, we really weren’t expecting any in the spring semester.

I think to your second question of why you wouldn’t see more, I think it’s because the peak season for kids going back to school in the fall, really doesn’t start until June at the earliest. It really gets going in earnest in July and August. And so I think we’ll start to have an early reader batches to set expectations in the second quarter earnings, but I think it will still be preliminary. I think where we will really sort of fully understand the benefit and our success in competing for this new business is when we report out on peak performance, which is obviously always been third quarter type of conversation.

Jeff Adelson: Great. Thank you guys. Appreciate it.

Operator: We will take our next question from John Hecht with Jefferies. Please go ahead, your line is open.

John Hecht: Afternoon. Thanks for taking my questions. Just looking at margin, NIM, it looks like — well, the direct-to-consumer deposits are stabilizing. I’m wondering kind of given the yield curve outlook, what we should think about the NIM kind of fluctuations as — I think you have about two-thirds fixed rate loans and one-third adjustable rate loans? And so maybe you could kind of give us some details about how the reset period looks for that group? And then thinking about CD maturities and repricing of that, what we should think about the cost of liabilities and how that affects NIM over the next few quarters?

Pete Graham: Yes, I don’t necessarily want to get into all of the mechanical parts of it. But what I would say is when we originally set our guidance, we were expecting five rate cuts this year. And we also talked about, in the last call, that we’re mildly asset-sensitive and then flip to being liability-sensitive over a longer period of time. And so sort of higher for longer, at least in the short term is, mildly beneficial to us because we’ll earn more on the asset side over the near-term as the short-term rates don’t get lower this quickly. So, at the margins, it’s probably net positive towards NIM for the year and maybe the NIM compression they anticipated happening, doesn’t happen as fast. But we’ll wait and see how that develops over the course.

John Hecht: Okay. And then remind us — remind me when — when the reset of the adjustable rate occurs and what it’s reset off of?

Pete Graham: So, our loans are SOFR-based and largely, sort of, a monthly reset. Obviously, the deposits are set in the market, but generally referencing off of Fed funds or other short-term rates, but competitively priced in terms of deposit flows. And then the ABS is also SOFR-based, but generally, the reset periods can be slightly longer on that.

John Hecht: Okay, that’s very helpful. Thanks.

Operator: [Operator Instructions] We’ll take our next question from Rick Shane with JPMorgan. Please go ahead, your line is open.

Rick Shane: Thanks everybody for taking my questions. Good afternoon. Look, I’d like to pull a little harder on the thread that Jeff started, which is thinking about sort of — or how to calibrate for loans and modification? I think it would be really helpful if you would show — as you show with the dollars of loans and forbearance, the dollars of loans in mod as well. I’d like to talk a little bit about the migration we’ve seen this quarter. If we go back to last quarter, implicitly, there were about 70 basis points of loans that were in the qualifying period. That’s the difference between the 3.9% and the 3.2%. That represents, call it, $105 million worth of loans. What percentage of that $105 million actually was successful and emerged from that period and is now fully modified?

Jon Witter: Yes, Rick, I think the way that I would think about it is a loan would only show up as being modified if they were successful at making their three qualifying payments and then they would go into and be counted as a modified loan for the duration of whatever that particular program was. So, if it was a short-term rate reduction, that would be a certain timeframe, if it were a longer-term further, that would be a different timeframe. But you don’t get counted in those numbers unless you’ve made your three qualifying payments. And if you fail to make your three qualifying payments, generally as a rule, you were put back into the delinquency bucket at the level that you would have been given that payment history. So, it is a, in my mind, pretty clean test.

The customers that are in here are the one that have been successful at qualifying for those payments over the course of a quarter, three months. And if you don’t qualify, then you move very quickly back into sort of the rest of the delinquency buckets and you continue to age and perform as you would as a result.

Rick Shane: Got it. But here’s what I’m trying to understand. So, — and correct me if I’m wrong, I understand that 2.7 this quarter, 3.2% last quarter. The difference between the 3.9% and the 3.2% last quarter to be people who have been off of loan modifications, but have not yet met the three payment standard. So, they are still showing up as delinquent, but the expectation is that if they meet that standard, they will migrate. And what I’m looking at is, in the last quarter, there were $107 million specifically — or implicitly of loans that were in that test period. This quarter, sequentially, delinquencies declined $90 million. So, what I’m trying to understand is of that $107 million that could have rolled through and improve your delinquencies, how much did that $107 million contribute to the $90 million improvement we saw?

Jon Witter: Yes, I understand that question. I don’t think we have provided that level, Rick, of detail and disclosure.

Rick Shane: Got it. Okay. I appreciate it.

Pete Graham: Just to add, there’s some additional sort of tabular disclosure on the dollar amounts of — in modification in footnote for — if you look at that and that doesn’t give you what you need to do the calculation you’re looking for, then just reach back out to Melissa and we can dig into it more.

Rick Shane: Terrific, I appreciate that. And just if I can indulge one last one. How do you — when the loan is modified, how do the economics change? That presumably changes the cash flows, does it change the GAAP accruals from an income perspective?

Pete Graham: Yes, it will. Presumably the modification will depend on each of the programs, whether it’s a rate-based program, whether it’s term-based program, et cetera. And then again, once those qualifying payments are made, they come out in delinquency bucket and they go back into the book and whatever the modified terms are, will drive the accruals.

Rick Shane: Terrific. Hey I realized I had some pretty in-the-woods [ph] questions. Thank you guys very much.

Pete Graham: Sure.

Operator: We’ll take our next question from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom: Okay, thanks. Good afternoon.

Pete Graham: Good afternoon.

Jon Arfstrom: You guys made a comment about slower prepayment speeds and curious if that was a surprise at all for you? Anything to read into that? And do you expect that to continue?

Pete Graham: No, it’s or just — each time we run through the process, we look at recent performance trends and we’ve seen over the recent past continuing improvement in the sort of overall lower levels of prepayment. And as we looked at that trend and kind of roll that for another quarter, it caused us to make a different assumption regarding our longer term outlook for prepayment.

Jon Witter: And Jon, I think the thing I would add because I think we have seen there’s a number of factors that influence prepayment. Obviously, rate environment is a big part of the sort of calculus there. And so I think the changing rate outlook from the beginning of the year, if you had said to me, if rates behave this way, the way that they behave, are you surprised that consolidations would have continued to slow? I would have said, no, I’m not surprised by that. I think we were all expecting at the beginning of the year, a different rate environment and I think that goes into the equation as well.

Jon Arfstrom: Okay, fair enough. And then just one more. Your stock has done well recently. I think you deserve it. But are we still in the green zone on the buyback? And just curious how aggressive you’d like to be on that? If you can provide us with any color on your thinking?

Pete Graham: Yes. Again, we reassess that at point in time. And as you probably observed, the rates market has been fairly volatile to start the year. And that will be sort of a game time call as we evaluate time with the next transactions. But this — the transaction we had done in the first quarter was at a point in time when rate were a little more favorable than maybe they are on spot today, but expectation is as we move through this year, there will be other opportunities that present themselves.

Jon Arfstrom: I think I confused the question, Pete, but I was asking on the buyback, the share repurchase program, how aggressive you guys–?

Pete Graham: Yes. So, as I said in the last earnings call, we’re going to be more programmatic around the buyback program this year. And so with the first — once that we completed in the quarter, we put a plan in place to buy back shares and we’re going to be programmatic across — to try and be in the market across the trading days period this year as opposed to in and out in periods of time.

Jon Arfstrom: Okay. All right. Thank you very much.

Operator: This does conclude the Q&A portion of today’s call. I would now like to turn the floor over to Mr. Jon Witter for clone remarks.

Jon Witter: David, thank you, and thank you to everyone who joined in and joined us this evening. Again, we are excited about the first quarter performance. I think we are excited about the outlook for the year and look forward to continuing to discuss our performance with you as the quarters unfold. As always, if there’s more detailed questions or things that we didn’t get to, please feel free to reach out to Melissa and our team and happy to follow-up over the course of the next couple of days. And until we talk to you next quarter, thank you again for your interest in Sallie Mae. Have a great evening. I’m sorry, Melissa, back to you for some closing business.

Melissa Bronaugh: Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors’ page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today’s call.

Operator: Thank you. This concludes today’s Sallie Mae first quarter 2024 earnings conference call and webcast. Please disconnect your line at this time and have a wonderful evening.